EXERCISE 5-12 (30 MINUTES)

5. This problem clearly illustrates the point that a scattergraph should be the starting point in all cost analysis work. In this case, it should be pre-ferred over the other two methods as a cost estimating tool. The change in the basis for the lease payments above 19,500 direct labor-hours causes a discontinuity in the regression line. In fact, two lines rather than one provide the best fit. The cost formulas computed with the high-low and regression methods are faulty since they are based on the assumption that a single straight line provides the best fit to the data. The high-low method, of course, is always suspect since it relies on only two points (which in this case gives the regression line too steep of a slope). The least-squares regression method should be used in the Franklin plant only if two separate regression formulas are computed—one for the activity level over which a fixed fee on rented equipment is in effect, and one for the activity level over which hourly rates are in ef-fect.

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Solutions Manual, Chapter 5

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Group Exercise 5-29 Student answers will depend on who they contact. Perhaps surprisingly, many organizations make no attempt to formally distinguish between vari-able and fixed costs in their planning and in controlling operations.